Limit public service competition to non-profits

The idea that competition is better than monopoly provision in public services is now established wisdom among the British political elite. Since the advent of something commonly called “New Public Management” in the early 1980s, privately managed organisations have been taken to be more efficient and innovative than public ones.

But is there, to coin a phrase, a third way? Competition without private interest companies? The belief that the private sector is inherently good has meant we may be completely missing a simple but effective solution to many policy problems: limiting public sector work to organisations without private interests.

Here it is worth thinking about the notion of public service, or public interest, organisations. My Manchester colleague and Nobel Prize winner, Professor Andre Geim, did not want to patent any of the discoveries associated with wonder-material “Graphene”. As far as Andre is concerned he works for a public organisation and should not personally benefit from publicly funded research.

Now the University of Manchester is not, strictly speaking, a public sector organisation in the sense that it is not owned and controlled by the state. The Office of National Statistics counts it as being in the private sector for the purposes of economic measurements.

However, Andre is right – most people see us and most other universities as “public interest” organisations. This fuzzy “grey” category includes not-for-profit organisations of many types: free-standing public corporations; “bodies corporate”; public interest companies; voluntary and charitable organisations and so on.

Going private

New Labour continued the Major government’s policy of introducing limited competition mainly within the public sector and limited outsourcing to the private sector. But there were two distinct strands to this policy. One was introducing competition within the public sector through devices like league tables (eg in health and education). This was competition not based mainly on financial incentives but on prestige and results.

The other strand was to continue Tory policies of introducing limited private sector involvement – either by complete contracting out or private management of still public organisations.

The coalition government, since 2010, has sought to massively expand this private sector involvement. According to one expert about one third of public expenditure on services – or about £80 billion per year – is now outsourced to the mainly private sector “public services industry”. But is this evidence-based policy, or just ideological obsession?

One of the problems with the rhetoric of competition and outsourcing is that it systematically subsumes two assumptions together: one, that competition is good; and two, that private sector provision is better than public.

Private gain, public loss

First, these two policy aims might actually conflict with one another – in practice outsourcing to private suppliers has often led to de facto monopoly provision with no real competition after an initial flurry. The barriers to entry are so high that genuine competition fades away.

This can leave monopoly private providers in a powerful position – a very real example of “producer capture” from which neither users nor taxpayers are likely to benefit. The obvious policy solution to this is to have lots of small suppliers and lots of contracts – but that in turn pushes up contracting costs and reduces the scope for “economies of scale”.

Second, the assumptions about private sector provision being more efficient are dubious at best. One important strand of research in recent years has been into “public service motivation” or PSM. This seems to have been spurred by the events of 9/11, when so many public service personnel died trying to protect their fellow citizens in New York. What most of this research shows is that public organisations have an advantage over private sector ones because of their intrinsic public service ethos which creates higher levels of commitment – something the private sector has been pursuing for years through various management fads.

“Co-production” – the idea that public services can only deliver through co-operative partnerships between “producers” and “consumers” – likewise tends to show that public organisations have distinct advantages in being able to mobilise co-producing activities among their “customers”.

Finally, public interest organisations don’t have the same hang-ups about “commercial confidentiality” that private sector ones do, making transparent contracting and accountability much easier.

Public service, public interests?

So one policy option that would be worth exploring would be to limit public service “markets” to “public interest” organisations (broadly defined). This could provide some (limited) competition while at the same time avoiding the downsides of private sector provision. We could have some diversity and innovation in organisational forms and approaches, while at the same time getting the best out of the “publicness” of the participants.

There may be legal obstacles to such an “internal market” approach, but these can be overcome. Research funding is distributed between universities on a (mostly) competitive basis, but the awarding of such funds is effectively limited to public interest organisations without running foul of EU competition laws. So there must be a way of avoiding this problem.

Public sector markets that are just that – “public sector”, but competitive – and are surely options worth considering?

Great blog. Our polling found that most people want to see organisations with a ‘social purpose’ prioritised over private companies in the tendering process. We’re calling for a Public Service Users Bill to push for this policy amongst others that are needed to promote public ownership, stand up for public service users and hold private companies accountable. http://weownit.org.uk/public-service-users-bill I hope we can stay in touch and work together on this.

I think the real problem here is that often in the public sector context there are intangibles that are hard to capture in the tender and contract process. So the private sector can often win business and then make a profit by eliminating all the costly but not-contractually-specified aspects of the activity that the previous public sector provider did because of its commitment to public service. So my conclusion would be that it makes sense to try to create a competitive market including private sector providers where we are confident that all significant and relevant aspects of the activity can be captured in a contract. Where we are not confident of this, we should either stick with public sector providers or allow some form of competition between non-profit providers. Of course, this still leaves massive scope for argument – for example, are we confident that all significant and relevant aspects of running a prison can be captured in a contract?

Interesting idea — but the cynic in me shouts “beware!” Creating competition among (we assume) public-regarding non-profits will tend attract folks into those organizations who are more likely to behave as self-serving entrepreneurs than as the public service motivated altruists we so cherish. While we have all been impressed with the indications of PSM in recent research, we can’t totally dismiss the possibility that the Niskananian budget maximizer may be lurking just beneath the surface (or in the private sector at the moment), awaiting the opportunity to make the leap to a position in a (potentially) more lucrative non-profit world where managers will find ways to replicate the rewards they might have received in the for-profit world.